Fees ban: is a landlord sell-off and rising rents the next step?

Fees ban.jpg

After the introduction of the Tenant Fees Act on June 1, will landlords be encouraged to either sell off their homes or increase rents?

The Tenant Fees Act 2019 finally came into force on the first day of June, changing the rules on the fees landlords and letting agents can charge as well as capping security and holding deposits. There have long been fears that the introduction of the ban, which could lead to higher management fees for landlords, will see them exiting the market or levying higher rents on tenants to offset their own increased costs. Is this actually going to be the case, though?

Sell-off gathers momentum

On the eve of the fees ban being implemented, trade body ARLA Propertymark released data revealing that the feared Sell-off of rental properties was starting to become a reality. In April, letting agents recorded the highest number of landlords selling their buy-to-let properties since May 2018. The number of landlords exiting the market rose to five per branch, up from four in March.

At the same time, the proportion of tenants experiencing rent increases also grew in April, with some 33% of agents witnessing landlords upping their rents. This was up from 30% in March. Looking at this figure on a year-on-year basis, this was also up from 24% in April 2017 and 26% in April 2018. By contrast, the number of tenants successfully negotiating a reduction in rent dropped from 2.9% in March to 1.9% in April, the lowest figure seen since May 2016.

Despite the rise in Sell-offs, though, supply is still holding up. In April, it was only marginally down to 202 per member branch, from 203 in March, which itself was the highest number since ARLA’s records began in 2015. What’s more, supply was up 13% year-on-year, rising from 179 properties per branch in April 2018. 

“As predicted, April’s findings have shown an upsurge in the number of landlords selling their buy to let properties,” David Cox, chief executive of ARLA Propertymark, said.

“The Tenant Fees Act, coupled with the proposed scrapping of Section 21, is forcing landlords to either increase rents or leave the market altogether.”

He added: “As supply of rental accommodation falls further, tenants will only be faced with more competition for properties, pushing up rent prices on good-quality, well-managed properties and decreasing tenants’ ability to negotiate rent reductions.” 

“In order to remain profitable, landlords will increase rents to cover the additional fees they are now faced with and as a result, tenants will continue to feel the burn.”

A threat to the industry?

Various impact assessments have been carried out to try and estimate the potential damage and cost the fees ban could cause. One from the government last year suggested that in the first year of the Tenant Fees Act being in operation, letting agents would take a hit of £157 million, while it would collectively cost landlords almost £83 million. Meanwhile, ARLA Propertymark commissioned Capital Economics to analyse the possible economic impacts of the ban on letting agent fees. It found that, in the most likely outcome, letting agents will lose £200 million in turnover, landlords will lose £300 million in income and tenants will pay £103 more per year in rent.

It also said that the lettings sector employs approximately 58,000 workers in England and Wales, with the impact of the ban expected to be a loss of 4,000 jobs. The impact assessment claims that, while renters will benefit from a reduction in upfront fees, much of this will be passed back to them via increased rents. Although tenants who move more frequently could enjoy a saving on overall costs, those who do so less frequently (in particular lower-income families) could see a loss.

The counter-argument fears that the fees ban will lead to agents absorbing costs, then passing these on to landlords with higher management fees, who in turn will pass these on to their tenants, is the example set by Scotland. Housing charity Shelter, for instance, says that rises in rent in Scotland had been ‘small and short-lived’, in spite of predictions that rents would increase more heavily. Since the 2012 introduction of the ban in Scotland, evidence suggests there has been no noticeable rise in rents or landlords exiting the market. 

But opponents argue that all the hits to the buy-to-let sector in recent years – including the extra 3% stamp duty surcharge and the phasing out of mortgage interest relief – have left many landlords considering their investment, with the fees ban potentially being the last straw. It will only become clear over time the true impact of the fees ban in England and (when it’s introduced in September this year) Wales too.